Boeing takes new charges on tanker, 747-8

April 27, 2016: Boeing took new charges on the KC-46A tanker and 747-8 programs, but not on the 787, its first quarter financial results announced.

Boeing took a $162m pre-tax charge on the tanker at Boeing Commercial airplanes. A charge of $80m was taken on the Defense side of the business for the tanker. Another $70 pre-tax charge was taken on the 747-8 program.

Cash levels were lower than that at year end, due to the shareholder buyback, lower deliveries and the “timing” of cash flow, the company said. With marketable securities, Boeing ended the quarter with $8.4bn cash and equivalents vs $12.1bn at year end. Year-over-year, cash and securities were $8.4bn to $9.6bn.

Initial analyst reaction follows.

Buckingham Research (Neutral)

 BA Reported 1Q16 core or non-GAAP EPS of $1.74 including a $0.24 charge related to the KC-46 program and a $70M charge on the 747 program. BA’s results also included several ‘below the operating line’ benefits vs. our estimates. Excluding the charges and below the line items, adjusted core or non-GAAP EPS of $2.07 compares with our $1.94 (and we think our estimates were below consensus).

Cash flow of $1.2B in the quarter was better than our $827M expectations – and above BA’s guide.

Compared with our estimates, BA benefitted from a lower than expected tax rate, lower ‘Eliminations’, lower ‘Other’ Items, and lower ‘Other Income’.

BA bought back considerably more stock in the quarter than we estimated – 28.6M shares for $3.5B vs. our $2-$2.5B estimate. 1Q is generally the quarter with the largest amount of buybacks.

Total 1Q16 sales of $22.6B include a $213M benefit from Unallocated items, eliminations, and other. Adjusting for this item, sales of $22.4B were above our $21.7B expectations. was in-line with our expectations and slightly below $21.6B and consensus $21.5B

BCA sales of $14.4B were in-line with our estimate, but below $14.82B for consensus. BCA reported operating income was $1.033B – 7.2% operating margin. Adjusting for the charges, adjusted BCA margins were 8.8% were nearly in-line with our 8.9% and below 9.2% for consensus.

The 787 deferred production balance in 1Q16 was $28.6B slightly better than our expectations for $28.8B.

Credit Suisse

Q1 Core EPS was a solid beat ex-charges (747 and KC-46), 787 unit deferred production performed well (showing a 30% sequential improvement) and the buyback of $3.5B was extremely impressive.  Boeing did not raise guidance, and we had not expected it to, but some in the investment community may be disappointed, especially those looking for an increase to BCA margin guidance, which may have been undermined by the above the charges.  In sum, we think the market continues to struggle with the overall cycle, from both a macro (global economy, oil price, FX) perspective and from a micro (pricing, cash generation potential) perspective and thus we do not expect a significant reaction in the shares today.

Goldman Sachs (Sell)

Boeing reported mixed 1Q16 results. Total adjusted (for another tanker and another 747 charge) segment EBIT is ahead of consensus. The Defense segment drove that variance, with both revenue and margins ahead. But Commercial Aircraft, even when adding back the tanker and 747 charges, missed consensus on both revenue and margins. We imagine the market will be more concerned with the BCA variance than excited about the BDS variance (and in our estimation the BCA variance has larger negative forward implications than the BDS variance does positive). Cash flow in the quarter was better than our estimate, though Boeing points partially to timing and receipts and expenditures. The sequential 787 deferred production increase declined to $141mn from $201mn last quarter. All components of the 2016 outlook were reiterated.

Wells Fargo (Outperform)

EPS SUMMARY. Boeing’s Q1 Core EPS of $1.74 was below our $1.83/consensus $1.85 due to charges on the KC-46 Tanker ($0.24) and 747 ($0.10) programs. These accruals were offset partly by: (1) otherwise strong margin (+$0.11) and revenues (+$0.12) in Defense (DSS) on higher F-15 and C-17 deliveries; and (2) lower corporate expenses (+$0.12). Excluding the KC-46/747 charges, Commercial Airplanes (BCA) margin was still only 8.8% — below our 9.5% estimate (-$0.11 EPS).

CASH FLOW. Q1 FCF of $0.5B was ahead of our $0.1B estimate, helped by an increase in payables. In Q1 Boeing repurchased 28.6M shares for $3.5B ($122 average), well ahead of our $1.5B forecast.

ORDERS. As expected, Q1’s book/bill was only 0.71x, as BCA (0.42x) booked only 12 net widebody orders; DSS’s book/bill was a solid 1.25x (P-8A and Apache helicopter orders).

2016 GUIDANCE. Boeing affirmed 2016 guidance of ”Core” EPS of $8.15-$8.35 (consensus: $8.51); BCA unit deliveries (740-745); and implied free cash flow ($7.2B; consensus: $7.7B). While guidance now includes Q1’s KC-46/747 charges, it also benefits $0.12 from a lower share count (i.e., accelerated buybacks).

787 DEFERRED. Deferred costs for the 787 rose $141M to $28.65B – a sequential deceleration from Q4’s +$201M and slightly better than company guidance (up $200M). We estimate that on a per-unit basis the deferred cost was about $5M, down from Q4’s $7M.

CONCLUSION. In all, we would expect a flat-to modestly negative reaction given: (1) the core EPS miss; (2) disappointing BCA margin (even after excluding the ”one-time” charges); and (3) status quo cash flow guidance and 787 progress. Also, we would now expect a significant decline in share repurchase. We think bulls will point to flat EPS outlook despite charges implying better underlying earnings.

23 Comments on “Boeing takes new charges on tanker, 747-8

  1. Hello Scott and Bjorn,

    I really appreciate your deep analysis and coverage of these interesting topics regarding the aviation industry and the manufacturers.

    I would like to know your thoughts on the recent issues Airbus seems to be facing on the A320 Neo Series and the A350, that took my attention after some comments made by Qatar (http://www.bizjournals.com/chicago/news/2016/04/26/qatar-airways-could-shift-some-airbus-orders-to.html?ana=yahoo) and (http://finance.yahoo.com/news/qatar-airways-urges-airbus-resolve-112808058.html)

    Best Regards,

    Beck

  2. Boeing actually took a $243m pre-tax charge on the KC-46. You missed a related $81m pre-tax charge in Boeing Military beyond the $162m in BCA.

  3. The backlog has never been so high and deliveries are breaking records year after year. And I don’t think the debt load is an issue either. So Boeing’s financial position looks strong and I don’t think it will ever get much stronger. Not for the foreseeable future anyway. But from here it can only go downhill because there are too many weak spots in Boeing’s portfolio:

    787 – That is Boeing’s best prospect and it should have a stellar future. If Boeing ever gets in trouble this is the model that will save the show. That is the reason this plane was built in the first place. But as we all know today things did not turn out that way. First the plane is still too costly to manufacture. Second, Boeing cannot sell it above its expected costs because of a: stiff competition and b: weak demand. And that is a deadly combination in itself. If it was only for that we could still have hope that things will get better in the future; i.e, costs can still go down and if demand increases it will allow Boeing to ask a higher price, right? No, Boeing could still not ask a higher price because the competition is still there, stronger than ever, with the A330neo and A350. And I have not discussed the deferred costs yet. If we add the tooling the deferred costs are still over 30 billion dollars. That is a large some of money even for a big company like Boeing. So we can expect the 787 to continue to have a negative impact on Boeing’s revenues for an indefinite period of time. I didn’t say for ever.

    777 – This is by far Boeing’s biggest cash cow. But it was not always like that. As we remember the first generation of 777 did not sell very well. But Boeing addressed the problem by introducing new models that corresponded perfectly to what the market needed and the competition had nothing to match. This situation allowed Boeing to thrive for many years, and they deserved it because their engineers did a fantastic job while the Airbus engineers got stuck in the four-engine concept. They were the first to come out with a large twin but they dropped the ball and lost the race. But that was then. The situation has evolved considerably since that time. The Airbus engineers finally came to their senses and introduced the fabulous A350. I was afraid it would be caught in between the 787 and 777, but what is happening is that it is the 787 that finds itself caught in between the A350 and A330neo. As for the 777 its supremacy is seriously challenged by the A350. It is still too early to say much about the 777X and as far as I am concerned the jury is still out. But I am afraid the A350 might prevail. It’s only an intuition because for now the 777X is still a paper plane. Around EIS we should have a much clearer picture. What worries me most is the transition period. If everything works well for the 777X that period should be painful but short. On the other hand if the 777X encounters some unexpected difficulties the gap will increase and this could have a significant impact on Boeing’s revenues.

    737 – Like the 777 this is also a cash cow for Boeing. But she is getting old and can no longer produce 3.8% milk. We will soon have to get used to the scrawny 1%. I am talking of margins of course. There is no problem with the backlog, which has never been so big. But if I was Boeing I would not try to increase production too fast because that could have a negative impact on the book to bill ratio. That’s because I don’t expect Boeing to garner new orders as easily as what we have been used to in recent years. First the world economy is slowing down, and this looks like a long-term trend. Second, there is new competition. Boeing seems to take the C Series very seriously and is willing to give away its smaller 737 variants rather than loose a sale. That is not very good for Bombardier of course, but it might also hurt Boeing over the long term if the C Series prevails. But there is much stiffer competition coming from the other side of the Pond than from the other side of the border. For the A320neo family finds itself in a much stronger position versus the MAX than the previous ceo generation ever was against the NG. We all know that this cannot continue indefinitely. Something will have to be done soon. I would even say that something should have been done long ago because it may already be too late now.

    • Airbus engineers might have come to their senses when they launched the A330/340 a few years before the great 777. Breaking the MD / Boeing duopoly.

      The A330/340s line in TLS produced 1650 so far, upping production to 7 a month as we speak.

      • The 330/340 is precisely what I had in mind. There was an internal battle inside Airbus; one party wanted a twin, and a twin only, while the other party wanted to have a convertible aircraft: twin or quad. From an engineering standpoint it is particularly well executed. But that led Airbus on the wrong path and they repeated the same mistake with the 500/600, except that this time it was going to be a quad only. It may have taken a relatively long time but eventually the 777 triumphed after some important modifications were carried out. The same could be said of the A330/A340, except that Airbus only had to drop the quad option to solve the problem. But by the time they came to their senses the 500/600 had already been launched. The whole quad adventure, including the A380, has cost Airbus a lot of money, time and effort; all wasted on an obstinate view. Airbus were the first to implement the concept of the Big Twin. All they had to do was to stay on the same path instead of going back to the 707 era.

    • Norman: Is the C series really the issue or bridging the 737NG to 7376MAX?

      With all the talk of a 7.5 -7, it looks far more like a move to have a direct competitor for the
      A320.

      • The C Series is the least of Boeing’s worries. Or at least it should be. I am afraid they are wasting time on the lower end of the segment. They don’t stand a chance against the C Series, especially the CS500, and they should recognize that fact and cede them the entire 100-150 segment. That would allow them to put their effort, and money, where they can still make a difference: the 160-220 segment. If Airbus had a machiavellian mind they would form an alliance with Bombardier in order to squeeze Boeing out of the narrowbody market. But in reality they don’t need to do anything at all, for Boeing is perfectly capable of evicting itself without any outside help. They make me bang my head on the wall: boing-boing-boing-boing-boing-boing. 🙁

        • And yet its Boeings stock thats doing nicely and Bombardier which has the penny stock status. Save your head banging for Bombardier when you look at their entire aircraft range.

  4. Re: the deferred costs, is the deceleration attributable to…

    – Boeing reducing production costs
    – increased revenue from each unit sold compared to early contract pricing
    – or a bit of both? Which has a greater effect?

    • The revenue from the terrible teens as they slowly go out the door -again- is probably slowing the 787 deferred costs rise, the other factor is the higher selling prices as they move down the order list.

  5. From a PaxEx perspective, I think if Delta does order the CS300 in the numbers being discussed, and the runaway success of the A321 v. the 739/Max9, the writing should be on the wall: the 737 fuselage has (finally!) run its course. The Ryanairs & SWAs of the world will work the 737 effectively for at least another generation, the backlog is healthy for Boeing.
    But they really are constrained. As an enthusiast and not an industry person, I’m not a Leeham subscriber, so I don’t know what their analysis of the mooted Max10 says. I can tell you what my passenger though is, though: Ugh.
    If Boeing is going to build a new wing, wingbox, landing gear, etc and spec a new engine, then for goodness sake come up with a competitive fuselage that comfortably seats 6 abreast. The CS300 is gonna kick the 737 PaxEx once fliers get a taste.

    • Embraer Ejets and CSeries, wide seats and few middle seats.
      The evolution of comfort.
      Next step, the gold standard for 200 seats with 18″ wide seats at 2-2-2 with no middle seats.

      • Yes! 2-2-2 would be a game changer but it would cost more to build and operate than a clean sheet 3-3. I would hope it happens but wonder how much more I would be willing to pay for that ride.

        For short haul it stands out for boarding and exiting time and ease. For long haul (“MOM” sort of long haul) it would challenge (and exceed I think) the wide body and narrow body options in terms of comfort and ease. Yet, it probably all comes down to total cost per seat/mile. Hope it happens but maybe not likely.?

        If B did this and took a 50% interest in the C series (a fantasy?) they would own the 125 to 225 seat market in terms of quality/comfort but probably not cost.

        • The airlines wont buy it, there is no evidence that they are pushing for this and the builders dont see it as a design breakthrough.

          • But, there is limited space at airports, so turn time is a way to gain capacity, and this is where twin aisles help, be it a 2-2-2 or 2-3-2 solution. Plus whatever small cost there is for more comfort, people will find value in and seek out, given a rational market.

            The A330 will compete for a long time against the 787 and A350, and part of its strength is a more preferable seating arrangement.

      • Around 2007 I looked into a 2-2-2 MoM but later on concluded it would be hard to compete with same capacity/range but 20 inch leaner single aisle fuselages. Except maybe when you need to go over 250 seats. At that stage 2-3-2 start looking good too. Structural efficiency of long stiff tubes. Cross section has a relation to weight, drag and maintenance cost, CASM.

        http://i191.photobucket.com/albums/z160/keesje_pics/greenliner-1.jpg

  6. Dear Scott, is there any explicit explanation of the BCA/BDS breakdown of the $243M pretax KC-46 charge downs? I’m hard-pressed to understand, on the surface, why three quarters or more of the charges are not on Boeing Defense’s “back”. I’m guessing the only way it “breaks” this way–with much more of the charges to BCA–is “way under” line production and/or revenues of 76s, 2Cs, and KC-46s during the first quarter of 2016. Thanks, MO

    • @Osprey, no, no explanation on tanker charges.
      Re: 787 deferred, 787-10 is part of growing costs, ramping up 787 production is probably part of it, too, and I think there are other factors, but I don’t recall specifics.

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